Buying A Lot

NEGOTIATING THE SALE

Buying a lot can be an intimidating process. Once you have narrowed your list to three or four lots, you will be ready to start working with the owners in earnest to see if mutually agreeable price, terms, and conditions can be worked out.

TYPES OF SELLERSIf you haven't already done it, you'll want to begin contacting owners of lots you are considereing. The first thing you will want to do is to "size them (the owners) up." What, other than the obvious desire for money, motivates people to sell real estate? There are several types of sellers you may have occasion to deal with.

THE PROFESSIONALIf the lot is in a new subdivision and is being offered by the developer, you may find that the price and terms are fairly well tied down.

This is especially true in an active building market where the developer has no trouble selling his lots. You will probably be able to do very little negotiating in this situation. It’s pretty much “take it or leave it.”

If you are looking at lots in older subdivisions or at acreage, the story is different.

THE "RELUCTANT RECRUIT"This is an owner you contact, who has not advertised his property, and really is not interested in selling. You’ll only be dealing with this type if you really want his property badly.

He will take some coaxing and some careful handling. Make him think everything is his idea. If you’re not careful, you may end up paying a premium for his property.

THE "HAPPY RECRUIT"This owner has not advertised, but once you contact him, he enthusiastically embraces the idea of selling. Find out what is motivating him and you may be able to turn him into type five (the motivated seller), below!

THE "CASUAL SELLER"This seller advertises his property, but doesn’t seem very excited about the prospect of parting with it. It is possible he has placed it on the market out of curiosity - to see what kind of offer it will bring - or that he is actually having second thoughts about selling it.

You must take a little time to find out where this seller’s “head is.” He may really be a motivated seller in disguise!

THE "MOTIVATED SELLER"This is the one you want to find. This seller wants to sell - badly! For whatever reason - behind in paying his bills, taxes are due, whatever - he needs the cash . . . usually in a hurry.

This is the kind of seller you want to deal with if at all possible. You’ll have a good chance of getting your price and terms. Give him some sympathy and let him think the ideas are his.

If he thinks you are a hot prospect, he won’t want you to get away. Note: for some reason a casual seller will sometimes masquerade as a motivated seller. Who knows why?

USING A REAL ESTATE BROKERIf you are a “horse trader” by nature, you may want to tackle the negotiations yourself. Otherwise, do your negotiations through a third party. Some people believe that all negotiations involving buying a lot should be conducted through a third party.

It certainly helps keep negotiations on an impersonal, unemotional level. Remember, however, that if the broker is to receive a fee from the seller (which is usually the case), then, in reality, he is the seller’s representative.

As such, he is obligated to get the highest price possible for the seller. Not to mention that the higher the sales contract, the higher his fee will be. Never tell the agent what your final offer will be. The only person looking out for your interests is you!

THE OFFER TO PURCHASE

All offers and counter offers in buying a lot should be in writing, and should include not only the price you are willing to pay for the lot, but all the terms and conditions you are requiring to govern the sale.

Examples of what should be included in conditional clauses are included below. Just modify them to suit your situation, and be sure to consult your attorney.

PARTS OF THE OFFER TO PURCHASEYour Offer to Purchase will include some basic information about the agreement proposed including:

•A Legal Description of the Lot (address; or lot, block, subdivision)

•Who is Selling

•Who is Buying

It will also include all of the terms and conditions which will govern the agreement.

GETTING A LEGAL OPINIONThe purchase contract is a legal document. You can certainly write the offer yourself. It doesn’t have to be in “legalese." But you should seek the advice of an attorney before presenting your offer.

If you don’t have an attorney, find one now. And find one who is routinely involved in real estate matters - not someone who specializes in medical malpractice
suits!

TERMS AND CONDITIONS

DEFINITION - What are terms and conditions exactly? Well, very simply, the “terms” tell how the lot is to be purchased and include:

• Price
• Down Payment
• Method of Paying the Balance
• When title is to be transferred

The “conditions” state various circumstances which must be met before
you are obligated to close the sale. The “closing” is when the title to the property is transferred from the owner to you in exchange for the price agreed - either in actual payment or in a promise to pay, or a combination of the two.

Your promise to pay will be in the form of a note which is usually secured by a mortgage against the property. The mortgage pledges the property as collateral or security to guarantee payment of the note.

If you don’t pay, they have the right to force a sale of the property (foreclosure) to get their money. If you can, avoid personally guaranteeing the note. Make the property itself the only collateral backing your promise to pay.

COMPARISON OF TERMS AND CONDITIONSWhile the terms affect your pocketbook directly, the conditions are there to guarantee that you are getting what you expect. They are for your protection. All conditions must be satisfied or the contract is “null and void.” And you get your “earnest money” back.

Note that both terms and conditions are negotiable. That is, both you and the seller must agree on them all, or there is no deal. Don’t be afraid to walk away from an unfavorable deal!

TERMS

Remember, the terms of the contract between you and the owner of the lot will determine how much you will pay and how you will pay it.

PRICE
Figuring out how much you should pay for a given lot is always a problem
for the nonprofessional. Here are some pointers.

RECENT SALES IN THE AREA
One way to tell what lots are “worth” is to check recent sales in the neighborhood. You can either pay an appraiser to do this, or you can do it yourself. The registrar of deeds at the court house can show you where to look for copies of recent transactions.

These are filed by date and also by both the seller (grantee) and the buyer (grantor). In many cases the actual selling price is not given, but can be deduced by the amount of the tax stamp that is attached. Of course many jurisdictions now make this information available online.

TALKING WITH BUILDERS
Another way to find out about what lots are going for is to talk to some builders in the area. They are in the business of buying lots.

Also, talk with your banker. In the process of setting up construction loans, these folks order appraisals every day. Bankers often have "in-house" appraisers. They can tell you what lots are selling for in your area.

THE REAL DEFINITION OF THE VALUE OF A LOT
Remember, all this information just gives you an idea of where to start in your negotiations. In the final analysis, the value of a lot is exactly what someone is willing to pay for it. No more. No less.

Don’t be afraid to walk away from the deal if you can’t get the lot at a price which you feel is fair.

RATIO OF LOT COST TO HOME COST
Typically, the cost of the lot will represent 20-25% of the total price of the home. This is certainly not a hard, fast rule. We have seen many $400,000+ homes built on $40,000 lots.

Also, if you’re building in a resort area, the reverse may be true. How about a $400,000 beach cottage on a $1,000,000 lot!

DOWN PAYMENTThe amount of down payment or earnest money is also negotiable. Offer $500, but be ready to pay $1,000 or more.

METHOD OF PAYING THE BALANCEObviously you could simply pay the balance in cash at closing. However, you may want to conserve your capital for the actual construction. If you are buying from an individual, and it will be some time before construction
begins, it is not uncommon for the seller to agree to monthly payments on the balance.

Bank Financing Of The LotTraditionally, banks wanted you to have 10-20% of the total value of your new home in equity (your money). For most people building their own home, this was the lot.

Some banks are now advancing the cost of the lot as a first draw, at the time the construction loan is closed! This deal may only be available for licensed builders.

Check it out. You may be able to get a better interest rate from the seller (maybe even none)!

WHEN TITLE IS TO BE TRANSFERREDThis term essentially sets a date by which time the transaction of transferring ownership of the lot to you will be completed.

SUBORDINATIONIf the seller is financing the lot, you will want to have a subordination clause in your terms, stating that the seller subordinates his land loan to the construction loan.

This means that if you should default on your construction loan, the construction loan lender will be paid from sale of the property. The seller of the lot will be paid from what is left.

The deed of Trust securing the money you owe on the land should not be filed at the court house until after the construction loan is filed.

CONDITIONSYou will want your Purchase Contract to be contingent on several things. (The Purchase Offer becomes a Purchase Contract when both parties have agreed to its terms by signing the document).

BUILDING PERMITYou will certainly want to be sure that you will be able to get a building permit on the lot. After all, that is why you are buying the lot - to build a home on it.

There may be a number of reasons, not immediately apparent, as to why a permit would not be issued -for example, if a septic tank is required because sewer service is not available to the lot, but the lot is not suitable for a septic tank system.

So you will simply make the contract contingent on, or subject to, your being able to obtain a residential building permit for the lot.

AVAILABILITY OF WATERIf there is any doubt at all, you will also want to be certain that water - either from a well or from a municipal supply - is available in sufficient quality, quantity, and pressure for residential purposes.

SUITABLE FINANCINGIf you are planning to borrow money to build the home, you should make your offer contingent on your successfully obtaining construction and/or permanent financing.

You may spell out what your requirements are for the terms of these loans, or you may simply state that they must be suitable to you. The latter gives you the most flexibility for getting out of the contract if you so desire.

You simply state that you could not secure financing suitable to you (maybe you’re looking for an 2% loan)! If the seller is sharp, he may insist that you spell out what is “suitable.” If so, you will want to specify what you are willing to live with as far as:

AMOUNT (OF THE LOAN)

TYPE OF LOAN - Conventional, FHA, VA, etc.

INTEREST RATE

TERM - How many years you'll have to pay it off.

POINTSWith some types of financing you will be required to pay “points” to get the loan. This is a fee that you pay when you get the loan. One point is equal to 1% of the loan.

Eight points has the effect of raising the interest received by the lender over the life of the loan by 1%. Points are expensive. Three points on a $100,000 loan means you must pay $3,000 in cash at the time the loan is closed!

You can specify the maximum number of points you are willing to pay to get your loan.

TIME LIMIT(For securing the loan commitment)

THE TITLE OR DEEDYou will want to specify the quality of title that the owner will pass on to you. A good way to do this is to specify that the seller will convey the property to you by a General Warranty Deed (also known as a Full Covenant and Warranty Deed or just Warranty Deed).

This deed is used in most states, and is considered by many to be the best a buyer can receive. You will need to have title insurance on the lot to protect you from some defect in the title, whereby someone comes forth who could establish that their claim to the property was superior to yours.

If your seller is motivated , you may stipulate that he provides this insurance.

CLOSING COSTSThere will be some closing costs involved in transferring title of the lot to you. These may include the attorney’s fee, recording fee(s), and deed stamps. Who pays what is negotiable. Try to get the seller to pay it all! Don’t let the real estate agent tell you, “the buyer pays _______, and the seller pays _____,”

That’s baloney! It’s negotiable.

SURVEYIf a survey is going to be required to get your permit or loan, try to get the seller to pay for having it prepared.

CLOSING DATEYou will want to set a time limit on the satisfaction of all conditions.
You do this by setting a closing date. In other words, if the lot has not been closed by ________date, the contract is “null and void.”

EARNEST MONEYYou need to specify the disposition of the "earnest money" or “binder.”|When you make an offer to purchase real estate, it is customary to put up some money to show that you are serious. The amount is negotiable.

This is not the same thing as a down payment. Although, it is common to have the earnest money deposit be applied towards the purchase price if the deal is consummated.

Your purchase offer should specify who is to hold this earnest money until closing and what will happen to it should the deal fall through.

It is a good idea to have some third party, like an attorney or a real estate agent hold the money in escrow. Of course, you will want to state that the binder will be returned to you if all of the terms of the offer are not met.

If, on the other hand, all of the terms and conditions have been met, but you simply change your mind and decide not to buy this lot, you will forfeit the earnest money deposit.

TIME LIMITFinally, your offer should have a time limit for acceptance by the seller. This will depend on where the seller is and could be affected by other aspects of your offer that the seller may need to check out or consider.

Take these things into consideration, and place an exact time limit on the offer, e.g. “12:00 noon, Monday, December 29, 2008.” This is the time by which the seller must have the signed offer back in your hands in order to have a binding deal.

As you can see, there are several costs involved in the purchase of the lot. The seller may look at these costs very differently than you do. If he is a motivated seller or has been sitting on the lot for a while, he may not see them as “costs” in the sense that they are coming out of his pocket.

He will simply receive a little less. You, on the other hand, will have to dig deep and fork over!

Fight for these terms!

PURCHASING AN OPTION

WHAT IS AN OPTION?
Sometimes it is desirable to purchase an option rather than making an Offer to Purchase. An option is similar to a purchase offer except that while the owner agrees to sell, you don’t agree to buy.

The option agreement would contain all of the terms and conditions of your offer to purchase, but would only bind the seller for the term of the agreement - not you!

In other words, the seller would agree to sell you the property for a certain price and under a certain set of conditions, for a certain period of time. During this time the owner cannot legally sell the property to any one else at any price!

YOU PAY TO TAKE THE PROPERTY OFF THE MARKETWhat in the world could induce any property owner to agree to such a deal? Money! You have to pay for an option to purchase. The option fee may or may not apply to the purchase price (negotiable), but in any case is not refundable. if you decide not to buy.

You are simply paying the owner to take the property off the market for a specified amount of time (usually measured in months), and to sell it to you at any time you choose within the option period, at the terms and conditions set by the option agreement.

WHEN WOULD YOU USE ONE?Options are generally used by builders or developers to purchase larger or more desirable pieces of property - to give the intended purchaser an opportunity to check the property out, prepare plans, change zoning, and arrange financing.

They are common for commercial or industrial properties where advance planning may take several months or more. The seller doesn’t want to take the property off the market for that long without some compensation.

And the buyer doesn’t want to go to the trouble and expense to set the project up, only to have it sold out from under him. An option would be unusual on a single lot, but some circumstances may make it a desirable alternative to the purchase offer.

SUMMARY Well, you've found the perfect lot and made it yours! If you haven't already done it, it's time to start your house plans. You're making great progress.

You can do it!

For additional insight to buying your lot,
see Lesson Three of our online course
Successful Home Contracting.